Yupee ! U.K. Nationwide offers 125% mortgage

The Nationwide Building Society has introduced a mortgage allowing borrowers to take loans worth 125% of the value of the home they are buying.

It will only be available to existing customers in negative equity who want to move house.

Negative equity means that the value of someone's home is less than the amount they owe on their mortgage.

Nationwide said the deal was a very "niche offer" and that not everyone in negative equity would qualify.

The Financial Services Authority is considering limiting mortgage loans to 100% of a property's value.

'No more risk'

The Nationwide only offers new customers mortgages worth 85% of the value of the home they want to buy.

Under its new arrangement, borrowers would take out a loan for 95% of the value of their new house at a fixed rate of 6.73% for three years or 7.48% for five years.

They would then be able to add on the negative equity from their old home, up to another 30% of the value of the new property, at a higher fixed rate of 7.23% for three years or 7.98% for five years.

As well as borrowers having their incomes and outgoings assessed by Nationwide, borrowers also have to pass a stress test to ensure they can still afford the mortgage repayments if interest rates have risen to 9% or 10% once the fixed-rate element of the loan has expired.

So far none of the Nationwide's customers have taken up its offer.

A Nationwide spokeswoman said although the deal was first made available in June, it was not being actively marketed.

It was, she said, aimed at helping only a few existing customers who came to the society and asked for help because they found they were in negative equity but were being forced to move house.

In effect they are being allowed to take their negative equity with them to a new home, up to a maximum of 125% of the new property's value.

"The borrowers have to meet our own affordability criteria," she said.

Wrong again?

There has been much criticism of the loans above 100% that were available at the peak of the housing boom, which immediately placed borrowers in negative equity.

The most notorious were those offered by the now nationalised Northern Rock bank.

The Nationwide's deal was a "really consumer-friendly move" said Ray Boulger at mortgage broker John Charcol .

He added that at least two other major lenders were looking at introducing something similar for existing customers.

But financial planner Jonathan Davis, of Armstrong Davis, said the building society's new policy was a "joke", and that it exposed the lender to further losses if house prices continued to fall.

"You are taking people in negative equity, pushing more money down their throat to back an asset that is still going down in value," he said.

"All the banks and building societies thought they were going to get their money back when they lent gargantuan sums in the run-up to 2007 - they were clearly wrong then and they are wrong again," he added.